Bank of Botswana-BoB has announced a reduction in the bank rate from 5.5 percent to 5 percent. Briefing the media on October 24, BoB governor, Mr Moses Pelaelo (pictured below) explained that the outlook for price stability remained positive, as inflation was forecasted to remain within the 3-6 percent objective range in the medium term.
Mr Pelaelo said it was worth noting that inflation had decreased from 3.4 percent in August to 3.2 percent in September. He attributed the positive inflation outlook to subdued domestic demand pressures as well as the modest increase in foreign prices.
“This outlook is subject to downside risks emanating from sluggish global economic activity and the resultant low commodity prices,” he stated, noting that conversely, any substantial unanticipated upward adjustment in administered prices and government levies as well as any increase in international commodity prices beyond the current forecasts present upside risks to the inflation outlook.
The governor also indicated that the Gross Domestic Product (GDP) grew by 3.1 percent in the 12 months before June this year compared to a contraction of 0.7 percent in the corresponding period ending June 2016. He observed that the improvement in growth reflects a 4.9 percent increase in non-mining activity from 3.3 percent in the same period in the preceding year.
“However, output in the mining sector contracted by 10.1 percent in the 12 months to June 2017 compared to a relatively large contraction of 22.9 percent in the corresponding period in the previous year. It is projected that domestic non-mining output will be below trend in the short to medium term, constrained by continued modest growth in household incomes and restrained economic expansion in major trading partners,” he said.
Mr Pelaelo also stated that the economy is expected to recover gradually in the medium term, in response to the anticipated improvement in external economic conditions. Furthermore, he said global output is projected to grow by 3.6 percent compared to an estimated 3.2 percent in 2016 and 3.7 percent in 2018. This, he said, would reflect an expected improvement in performance in both advanced and emerging market economies.
He, however, pointed out that uncertainty surrounding global trade policy as well as the moderation of growth in China could adversely affect the medium term growth prospects. He said regionally, the projected weak economic growth in South Africa this year due to persistent subdued demand and low investor confidence could undermine growth by constraining private investment and household consumption.
Mr Pelaelo further pointed out that the current state of the economy; the domestic and external economic outlook as well as the inflation forecast provide scope for easing monetary policy to support economic activity without undermining the maintenance of inflation within the bank’s medium term objective range of 3 to 6 percent.
“Accordingly, the monetary policy committee decided to reduce the bank rate by 50 basis points to 5 percent. Commercial banks are required to make the necessary interest rate adjustment with immediate effect to reflect this policy decision,” he stated.